THE TRIPLE-A SUPPLY CHAIN

BY HAU L. LEE

Presented by: Paras Chamoli, Dhruv Gupta, Archit Dhasmana

ABOUT HAU L. LEE:
• Bio:
Hau L. Lee is the Thoma Professor of Operations, Information
and Technology at the Stanford Graduate School of Business.
His areas of specialization include global value chain • Publications:
innovations, supply chain management, global logistics, • Government Interventions to Promote Agricultural
inventory modeling, and environmental and social responsibility. Innovation; Duygu Akkaya, Kostas Bimpikis, Hau L.
Lee Manufacturing & Service Operations
• Academic degrees: Management; March 2021 Vol. 23 Issue 2 Pages 437–
452
• PhD, Wharton School, University of Pennsylvania, 1983
• Value Chains in a Post-COVID World, Hau L. Lee,
• MS, Wharton School, University of Pennsylvania, 1979 Haim Mendelson, Barchi Gillai Value Chain
• MSc, London School of Economics, 1975 Innovation Initiative,  June 2021
• BS, University of Hong Kong, 1974
• Sustainable Procurement Barometer 2021; Barchi
Gillai, Hau L. Lee, Anna Kapica-Harward, Gaytree
• Honorary Doctorate, Erasmus University of Rotterdam, 2008 Lallchand, David McClintock Value Chain Innovation
• Honorary Doctor of Engineering, Hong Kong University of Initiative;  August 2021
Science and Technology, 2006 • Books:
• Building Supply Chain Excellence in Emerging
Economies; Hau L. Lee, Chung-Yee
Lee Springer; New York; October 31, 2006.
 WHAT IS TRIPLE-A SUPPLY CHAIN?

• Lee says that it not possible to achieve a perfect supply

chain. He simply says it is not enough to deliver any
sort of real or lasting competitive advantage.
Instead, Lee says that what matters more are three
other attributes – the “triple-A's” of agility,
adaptability and alignment.
• Any company, organization or service provider
needs to have Triple-A.
 2003 STUDY: CONDUCTED BY STANFORD, INSEAD &
ACCENTURE

Supply Chain performance Categories

30%
Leaders
25%
Relative Transformers
Laggards
market 20%
Decliners
CAP 15%

CAGR 10%
5%
Industry Average 0%
-5%
-10%
-15%
-20%
1994-97 1997-2000
 SUPPLY CHAIN GLITCHES:

• More than 850 glitches from 1992-99 (WSJ &

Dow Jones News Services)
• Companies like Apple, Boeing, Sony resulted
in significant underperformance.
• Possible solution: Companies need to have a
good engine to deliver products to customers.
WHY IS IT DIFFICULT TO MANAGE SUPPLY
CHAIN?
Challenges Implications Solution

Increasing demand & Uncertainties drives AGILITY

Supply chain need for flexibility.
uncertainties
Shortening product & Dynamic Supply chains ADAPTABILITY
technological Cycles instead of Static Supply
chain.

Multiple outsourced Differential interests of ALIGNMENT

Supply chain partners. multiple players.
 AGILITY

• Definition:
Organization's ability to profitably
manufacture and deliver a broad range of
high-quality products and services with short
lead times and varying volumes, while
providing enhanced value to customers.

Importance:
• No way to exactly forecast to perfection.
• Best way to create a responsive engine.

IBM calls it sense & response.

 “SENSING IS IMPORTANT IF YOU CAN MAKE SENSE
OUT OF SENSE” – HAU L. LEE
• Information is distorted: Bull whip effect leads to exaggeration and distortion of signals
SENSIBLE SENSE & RESPONSIVE RESPONSE:

Sense Response

Preparedness Extensive information, integration, Robust design, flexible

knowledge sharing capacity, Supply
partnerships, contingency
plan

Activation & Early & correct signals, smart Fast deployment, leadership
Action analysis for causes and actions for command & control
alternatives.
EXAMPLE:

Sense Response Sense Response

Prepared Information Focused Prepared POS+, timely Supply
ness integration, POS manufacturing ness information partnership,
visibility, test market network, integration with multi-modes
distribution supply chain transport, DC
capacity, CAD, network merge, trust
capacity system for
reservation delivery
Activation Rapid updating, Agile
economic analysis integration, Activatio Weekly analysis Agile
& Action cycle, data cleaning, integration,
for replenishment design and n&
intelligent rapid new
planning production Action inferences product
postponement,
flexible transition,
manufacturing dynamic
shelves, frequent
“CRISIS BARED ONE’S WEAKNESS, OTHER’S STRENGTH”
–WALL STREET JOURNAL, JANUARY 29 2001

• March 17, 2000 lightning induced fire at

PHILIPS radio- frequency chips factory in
Albuquerque, New Mexico.
• PHILIPS was a supplier to both NOKIA and
ERICSSON.
• NOKIA responded quickly and learnt what
went wrong and changed the design of
processes to not suffer any losses.
• ERICSSON did not sense nor responded to
PHILIPS and was casual in their approach. As
a result they suffered a loss of 500 billion
USD.
 ADAPTABILITY

• Definition:
• Supply Web adaptability is the
capability of a company to
efficiently manage and react to
changes or disruptions (political
changes, natural disasters,
pandemics, resource shortages)
without substantial negative impacts
on time, cost, quality, or performance.
 LUCENT TECH 5ESS:
1980-90 1991-2000s
Complex technologies with Lucent as Responsive time a competitive pressure.
leaders.
Primary market in N. America. Fast growing market in Asia.
Supply base in Asia not well developed. Bulk of supply base in Asia.
Oklahoma City as central 1996 Taiwan & Qingdao as
procurement, stocking, kitting and Engineering, procurement and final
assembly site for North America & assembly hub for Asia backed up by
Asia. Oklahoma City.

SUPPLY CHAIN EVOLUTION AT LUCENT:

2000 Now 21 plants were
No. of Plants 29 5 sold off or
No. of suppliers 3000 900 closed. 4 plants
95% of total
No. of enclosures 47 7 production
Inventory turn 1 6-7 needs.
Profitability Heavy losses Profitable for 4
consecutive years
DYNAMIC SUPPLY CHAIN DESIGN:

Market Technology dynamics Supply Chain

Technology Leader, FOCUSED
concentrated supply demand.

Technology ramped up EXPANDED NETWORK

regionally, distributed supply
demand.
Technology maturity, globally VALUE CHAIN REDESIGN
distributed supply demand.
POSCO
“THE WORLD’S MOST ADMIRED COMPANY IN STEEL.”
(FORTUNE 2003)

RISE OF CHINA:
• Current industry challenge:
DEMAND SUPPLY
• Projected worldwide steel storage.
2003 (Metric 232M 220M
• In 2004-05: Iron ore rose by 20%. tons)
Coking coal cost rose by 80%. % world total 27% 23%
• Freight cost rose significantly. Change from 166% 100%
1995
• Increasing pressures of trade
barriers.
 DISINTEGRATION STRATEGY:

• Crude steel manufacturing near iron ore mines; finishing near customers

Iron ore supply Crude steel Finishing Plants

• JV and strategic alliances production • JV with US steel in 2002
with iron ore suppliers in • Plans to build crude steel on finishing plant in
Brazil and Australia. plants in Brazil & India Pittsburg.
• Majority stakes of
finishing plants in
coastal cities of China
($800 M investment in
1991-2003, additional
$1.3B by 2006)
 ALIGNMENT

• Definition:
• Since companies depend upon their partners to make goods
and services, conflict of interests cannot be involved
• Great companies take special measures to align the interests
of all the firms involved in their supply chain with their own.

• Importance:
• If any company’s interests differ from those of the other
organizations in the supply chain, its actions will not
maximize the chain’s performance
• A supply chain is as strong as its weakest link
• Win-win relationship is a cornerstone to the success of any
supply chain
 HP CASE STUDY
• Problem:
• In the late 1980s, HP’s integrated circuit (IC) division
attempted to hold as little inventory as possible
• These low inventory levels resulted in long lead times
in the supply of ICs to HP’s ink jet printer division
• In response, HP’s printer division started holding
higher inventories of printers, which in turn resulted
in higher inventory holding costs.

• Solution:
• In order to reduce costs, HP could’ve aligned the
interests of the IC and printer division by maintaining
a greater inventory of low costing ICs and fewer
stocks of expensive printers
 WAYS TO MAKE COMPANIES ALIGNED

Companies can align their partner’s interests with their

own by redefining the terms of their relationships so that
firms share risks, costs, and rewards equitably.
• For example, Toyota decided to bear the risk of selling
Prius, a hybrid car which came out in the US in the year
2000, by keeping the ownership with themselves and
storing the cars at their distribution center till the sellers
actually make a sale
• This incentivized the sellers to work harder to sell the
cars as they did not bear any inventory holding costs,
and hence had little risk.
LACK OF ALIGNMENT MAY RESULT IN THE FAILURE OF MANY SUPPLY CHAIN PRACTICES.

• For example, tech companies like Cisco, Dell, and HP set up

supplier hubs close to their assembly plants

• Vendors maintain just enough stock to match the manufacturer’s

needs and replenish the hubs without waiting for orders

• Such vendor managed inventory (VMI) systems puts all the cost
of holding inventories on the suppliers as the manufacturers do not
claim ownership of the inventory till they receive them at their
assembly plants.

• This results in the costs of manufacturers going down, but supply

chain costs remain unchanged

• VMI systems may sometimes generate friction because

manufacturers refuse to share costs with vendors.
USE OF INTERMEDIARIES:

• Sometimes the process of alignment involves the use of intermediaries

• In the case of VMI, for instance, financial institutions buy components from suppliers at
hubs and sell them to manufacturers
• Everyone benefits from this because the intermediaries’ financing costs are lower than the
vendors’ costs
• Such an arrangement requires trust and commitment on the part of suppliers, financial
intermediaries, and manufacturers, it is a powerful way to align the interests of companies
in supply chains
 SUMMARY
• Companies create alignment in supply chains by aligning information. All
companies in the supply chain get equal access to forecasts, sales data, and
plans
• Next they align identities; in other words, the manufacturer must define the
roles and responsibilities of each partner so that there is no scope for conflict
• Then companies must align incentives, so that when companies try to
maximize returns, they also maximize the supply chain’s performance. To
ensure that happens, companies must try to predict the possible behavior of
supply chain partners in light of their current incentives
• Companies often perform such analyses to predict what competitors would do
if they raised prices or entered a new segment; they need to do the same with
their supply chain partners
• Then they must redesign incentives so partners act in ways that is closer to